- Musei Vaticani, Cidade do Vaticano, Vaticano
I’ve watched with the curiosity as the Federal Reserve has valued the assets that they assumed from Bear Stearns in March… for the most part the securities have remained near par valuation… which is odd considering that the market for mortgage backed securities has been rapidly declining…
Bloomberg has a good article today that points to analysis that Bank of America has done… I’m curious though how BofA got access to the CUSIPs for the portfolio… because I’ve never seen them publicized… maybe Blackrock has been circulating an offering list of the specific assets… from BBG…
~~~~ “ The U.S. Federal Reserve may lose as much as $6 billion on a portfolio of mortgage-backed assets it took over from Bear Stearns Cos., according to Bank of America Corp. analysts.
The Fed will today announce its quarterly estimate of the fair value of Maiden Lane LLC’s $30 billion of holdings that JPMorgan Chase & Co. considered too risky when it acquired Bear Stearns in March, Bank of America analysts Jeffrey Rosenberg and Hans Mikkelsen wrote in a client note. The central bank valued the assets at $29 billion as of June 30, according to the report.
“With the worsening in mortgage markets since last quarter, we estimate a range of $2 billion to $6 billion of unrealized losses,” the New York-based analysts wrote….
… Valuing the Maiden Lane assets “puts the Fed squarely in the very position of the banks it regulates in dealing with mark- to-market accounting,” according to Bank of America’s report.
The U.S. Senate yesterday passed a $700 billion financial- market rescue package, which allows securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the credit crisis.
“This exercise illustrates the difficulties in measuring fair value,” the analysts wrote. “It will be interesting to see how and whether the Fed chooses to apply fair-value accounting principles.” ~~~~
The assets that the Federal Reserve assumed from Bear >> Maiden Lane LLC…
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Mark to Mayhem?
What would happen if we changed the rules?
Let’s find out.
Holman Jenkins, Jr.
The Paulson plan’s defeat on Monday was not the end of the world, and may not even be lasting. But it does invite us to revisit the sideshow of mark-to-market accounting.
Even as this agnostic column was giving birth to itself, the SEC’s chief accountant released a new “interpretation” late yesterday meant to relax these vexatious rules. The Dow jumped 485 points. Were investors reacting to the SEC announcement — or hope of the Paulson plan being revived in Congress? Perhaps they concluded that the two are one in the same.
OK, get out your NoDoz and let’s wade in. Under current interpretation of accounting rules, banks can be obliged to value loan holdings based on their liquidation or fire-sale value, even if (as now) the fire-sale values are lower than might be suggested by the cash flow and payoff prospects of the underlying assets.
Now recall that accounting is a language of abstraction. In the normal case of a public company, whatever method it uses to value its assets, it merely provides a benchmark for investors to make their own judgments. Nobody takes accounting values as the final word.
Banks, though, are subject to regulatory capital standards and therefore can be rendered insolvent overnight based on an accounting writedown. At the moment, many banks are clinging to “market” values for loans that are higher than probable fire-sale values, and doing so on tenuous grounds. In kibitzing over the Paulson plan, indeed, one knotty question was how Treasury could buy such loans at a price “fair to taxpayers” without propelling the sellers into federal receivership.
Because of all this, the regulatory state finds itself in a somewhat absurd position — its own rules could render many financial institutions insolvent in a manner inconvenient to the state.
We choose the adjective advisedly. These institutions are guaranteed by the federal government, implicitly or explicitly, so questions of solvency are largely academic — except as to the value of their equity. In fact, much of the ferocious argument over mark-to-market really is a political battle between CEOs and short sellers for control of the stock price. Washington wishes they’d just shut up before savers and lenders join the argument — because, in present circumstances, we’d call that a “bank run.”
Then there’s a third group on the sidelines who attribute religious or ethical superiority to mark-to-market. Their sentiments are simply misplaced. Mark-to-market and its alternatives all have their uses — a rose by any other name. A savvy analyst looks at them all with the same gimlet eye.
But usefulness is not what we’re talking about here — we’re talking about a regulatory trap for equity, created as an unintended consequence of a well-meaning accounting rule. Short sellers see this trap and try to exploit it. Uninsured lenders and depositors see it and worry about not getting paid back. That fear is why banks have all but stopped lending to each other — and why Henry Paulson launched his plan, and why the SEC made its move yesterday.
Accounting straddles the real and unreal, so it’s hard to guess how much difference getting rid of mark-to-market might really make. The only way to find out is to try.
A mere accounting rule change won’t reduce foreclosures or raise home prices — then again, if spared drastic writedowns, banks might be more willing to lend, raising home prices and reducing foreclosures.
A mere accounting rule can’t alter the underlying economics of a lending business — then again, no longer worried about insolvency-by-accountant, investors might discover new confidence to inject capital and improve the underlying economics of a lending business.
No accounting rule is worth $700 billion. Then again, the essence of the Paulson plan was to raise the value of bank assets to help banks escape the regulatory equity trap. Does that mean we can change an accounting rule and save Congress from having to appropriate $700 billion?
Let’s find out.
http://online.wsj.com/article/SB122282674006393009-email.html
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